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Why Jabil Circuit, Inc. Shares Tumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Jabil Circuit (NYSE: JBL  ) fell more than 20% Wednesday after the company posted mixed fiscal first-quarter 2014 results and weak forward guidance. In addition, Jabil announced it will divest its aftermarket services division for $725 million.

So what: Quarterly revenue fell slightly from the same year-ago period, to $4.6 billion, which translated to adjusted core earnings of $0.51 per share. By contrast, analysts were modeling average adjusted earnings of $0.55 per share on sales of $4.49 billion.

Worse yet, Jabil stated that, while its enterprise and infrastructure segment should remain flat next quarter, its diversified manufacturing and high-velocity businesses are both expected to decrease 25% year over year. As a result, Jabil guided for fiscal second-quarter 2014 guidance to fall in the range of $3.5 billion to $3.7 billion, with core earnings of $0.05 to $0.15 per diluted share. Meanwhile, analysts were looking for significantly higher earnings of $0.54 per share on $4.35 billion in sales.

Finally, Jabil stated that it has entered into an agreement to sell its aftermarket services business -- which last year accounted for $1.1 billion in revenue -- to iQor Holdings for $725 million. To explain its decision, Jabil asserted the segment's concentration on depot repair for consumer electronics simply doesn't align with its "strategy to focus on diversified manufacturing solutions."

Now what: Going forward, Jabil says, the sale should allow it to diversify its core manufacturing business by "potentially" adding more engineering intensive capabilities. Keeping in mind that Jabil also guided for a fiscal Q2 GAAP loss of $0.20 to $0.06 per share, the sale could also provide a nice cash cushion should its struggles persist.

What's more, Jabil also attempted to take some of the sting away by announcing a new $200 million share repurchase authorization.

Still, and even with shares of Jabil Circuit currently trading under nine times last year's earnings, I remain hesitant to step in at this point. Given Jabil's ballooning debt and struggling core operations, I'll be staying on the sidelines until the company proves it has what it takes to return to sustained profitability over the long term.

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9/30/2016 4:00 PM
JBL $21.82 Up +0.07 +0.32%
Jabil Circuit CAPS Rating: ***